How Is Your Credit Score Calculated?

Your credit score is a number that estimates how likely you are to repay a loan, but what is a credit score based on?

While the exact formula depends on whether the score is from FICO, VantageScore or another company, they all look at similar things, such as how much debt you’ve repaid in the past and how much credit you use now.

Key takeaways

• A credit score is meant to tell lenders how risky a borrower you are.
• It’s calculated from information on your credit report, such as your payment history and how long you’ve had credit accounts.
• Credit scores range from 300 to 850, with higher scores being better.

What is a credit score?

A credit score tells lenders how risky a borrower you’re likely to be based on your past behavior. It helps them decide whether they want to approve your mortgage, loan or credit card application and what interest rate they will charge.

The higher your credit score, the better your chance to get the lowest interest rates and best terms. Meanwhile, those with lower credit scores might struggle just to get approved for new debt.

FICO vs. VantageScore

Most credit scores used by lenders in the U.S. come from either FICO or VantageScore. Both use information from your credit report to determine your score, but with slightly different scoring formulas.

For example, payment history accounts for 40% or more of a VantageScore credit score but only 35% of a FICO credit score.

Other differences between the two include:

• FICO credit scores are much more popular, with 90% of the top lending institutions in the country using them. But VantageScore’s prominence is growing, and its scores are used for all mortgages sold to or guaranteed by Fannie Mae and Freddie Mac.
• VantageScore also gives scores for those with very limited credit histories, requiring only that you’ve had a credit account open for at least a month. To get a FICO score, you must have at least one active credit account open for six months.
• The two companies also treat new credit inquiries differently. With FICO, all credit checks made within a 45-day period usually count as a single inquiry, but with VantageScore, the period is only 14 days. This means your VantageScore could dip more than your FICO score when shopping around for mortgage or loan quotes.

How credit scores work

There’s no starting credit score, so you must start your credit journey before you begin to maintain a score. Your credit score will then go up or down based on your actions.

Lenders use credit scores to help them figure out what kind of borrower you’ll be and how likely you are to repay your debt. They may turn to credit scores from FICO, VantageScore, another scoring company or their own in-house models.

Credit scores are used when you apply for a mortgage, auto loan, student loan, credit card, home equity loan, personal loan, small business loan or credit line increase. Mobile phone carriers, cable and utility companies and landlords may use them, as well.

FICO and VantageScore credit scores usually appear as a three-digit number between 300 and 850, with higher scores considered better.

Here’s how lenders typically view different credit scores:

How to monitor your credit score

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How is a credit score calculated?

Your credit score is based on data from your credit report. Credit reports are prepared by the three major credit bureaus — TransUnion, Experian and Equifax — and they contain your past borrowing and payment history, the number and kinds of credit accounts you have now and how much debt you owe.

FICO and VantageScore use this info to generate your three-digit credit score. How the different factors are weighted depends on the company and which model they’re using.

Here’s how FICO calculates its credit scores:

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• New credit (10%)
• Credit mix (10%)

VantageScore’s most widely used scoring model (VantageScore 3.0) calculates its credit scores like this:

• Payment history (40%)
• Depth of credit (21%)
• Credit utilization (20%)
• Balances (11%)
• Recent credit (5%)
• Available credit (3%)

VantageScore’s newer scoring model (VantageScore 4.0) does things a bit differently, figuring scores this way:

• Payment history (41%)
• Depth of credit (20%)
• Credit utilization (20%)
• Recent credit (11%)
• Balances (6%)
• Available credit (2%)

What affects your credit score?

Different data combine to make the FICO and VantageScore factors mentioned above.

• Payment history. Your bill-paying behavior is the biggest factor affecting your score. Credit scoring models look at how much debt you’ve repaid in the past, whether you repaid it on time, any past or current delinquent payments and what you still owe on them, any bankruptcies and how long it’s been since you last had a problem with repayment.
• Amounts owed. Credit scoring models want to know you can manage your debt repayments, so they consider how much debt you currently have, what kind of debt it is, how much you’re using of any available revolving credit (like a credit card) and how much you’ve already paid on any installment loans (like a car loan). FICO groups all these factors into a single category called “amounts owed,” while VantageScore splits them into “credit utilization,” “balances,” and “available credit.”
• Length of credit history or depth of credit. Lenders like borrowers with proven track records, so credit scoring models reward longer credit histories. They consider how long your credit accounts have been open, the age of your oldest and newest accounts and the average age of all your accounts.
• New credit or recent credit. Credit scoring models view opening several new credit accounts in a short space of time as a red flag for possible cash flow problems. As a result, they’ll look at how many of your accounts are new, how many recent inquiries for your credit report have been made by lenders and how long it’s been since you opened a new account.
• Credit mix. Lenders like to see that you can manage different kinds of credit, such as revolving accounts and installment loans. Because of this, the credit score models reward those showing a history of good repayment on a variety of debt types. While FICO separates this information into its own “credit mix” category, VantageScore includes these factors as part of its “depth of credit” category.

What doesn’t affect your credit score?

While credit scores are based on your financial data, they don’t look at other personal details, like your race, national origin, religion, age or gender, as well as where you live or what job you do.

Although details about your income and employment history are also excluded from most credit scores, lenders will almost always consider how much you earn before approving you for credit.

How to get a good credit score

You can improve your credit score in several ways if you have the financial discipline and patience.

• Pay your bills on time. Making complete, on-time monthly payments can have the biggest impact on improving your score. You can set up automatic payments with your lenders to make sure your payments are made by their due date, or set up reminders to avoid missing a payment.
• Lower your credit utilization ratio. How much you owe matters less to your score than how much you use of your total available credit — known as your “credit utilization ratio.” For example, if you have two credit cards, each with a $10,000 credit limit, and you owe $2,500 on each, then your credit utilization ratio would be 25%. VantageScore recommends keeping your ratio under 30%, while FICO suggests aiming for 10% or less in order to help you maintain a good score.
• Pay down debt. Reducing the amount you owe shows lenders you can successfully handle your debt obligations. Clearing all or some of your credit cards’ outstanding balances can also lower your credit utilization ratio, which will further help your score.
• Check your credit report for errors. Because your credit score is based on your credit report, any mistakes on the report can unfairly lower the score. Review your report for any mistakes, and then dispute the errors with the credit reporting agency and the lender responsible. You have various ways to get free credit reports from the three main credit bureaus (TransUnion, Experian and Equifax) — for example, by visiting annualcreditreport.com.
• Build your credit history. If you’re new to credit, you might have a low score — or not even have one at all. Growing your credit history to improve your score can be tricky. Try to find products designed for those with low or no credit. Secured credit cards, for example, require a cash deposit as collateral but are viewed the same as regular credit cards by FICO and VantageScore. Or ask a loved one with good credit to be your co-applicant on a new credit account or add you as an authorized user to their card.
• Time your credit applications. If you apply for a lot of credit, FICO or VantageScore might see you as having money issues, especially if you’re a credit newbie (since any new accounts will also reduce the average age of your overall debt). If you’re shopping around for a mortgage, auto loan or student loan, make all your applications within a concentrated window of time — 45 days for FICO, or 14 days for VantageScore — so the credit scoring models treat it as a single new credit application.